George Osborne, the chancellor, has announced he will cut the "unsustainable" lifetime allowance – the maximum amount that can be saved into a pension – from £1.25m to £1m.

This comes as changes to the pension rules are set to revolutionise the way we take an income in retirement, scrapping the necessity for most people to buy an annuity. Instead, savers will be free to take their whole pot in one lump sum, or withdraw money from their account when necessary.

But the cut to the lifetime allowance is a blow to higher earners. The chancellor said it will affect less than 4pc of people.

The holder of the pension pays a 55pc tax charge on any amount over the lifetime allowance when they withdraw money or buy an annuity, rather than their usual tax rate. Tom McPhail of Hargreaves Lansdown calculated that the difference in the tax charge between £1m and £1.25m would be £87,500 for basic rate taxpayers and £37,000 for higher rate taxpayer (this is on top of their marginal income tax rate that applies on withdrawals). Click here for a full explanation on the lifetime allowance tax.

However, it was also announced that the lifetime allowance will rise in line with inflation (consumer prices index) from 2018. TheTelegraph has argued that the limit on pension saving punishes those who save early and have the most investment success.Greg Kingston of pension firm Suffolk Life said: “Talk of a pension lifetime allowance of £1m will seem meaningless to a 21 year old on the increased minimum wage of £6.70 an hour. Yet if that 21 year old works a 35 hour week and manages to put 20pc of their earnings into a pension then by the time they reach the age of 67 they could easily have reached this limit." That scenario, however, will be somewhat offset by the new link to inflation.

The move to cut the lifetime allowance was previously touted by both Labour and the Liberal Democrats. Labour also want to cut the annual allowance - the amount you can save each year - from £40,000 to £30,000 but Mr Osborne today made no change to the annual allowance.

Re-selling annuities

Mr Osborne also confirmed plans to allow pensioners to sell their annuities. From April 2016, the government will change the tax rules to allow people who are already receiving income from an annuity to sell that income to a third party, subject to agreement from their annuity provider.

The proceeds of the sale could then be taken directly or drawn down over a number of years, and would be taxed at their marginal rate, in the same way as those taking their pension after April 2015.

This is great news for those who have missed out on the pension freedoms. Annuity rates have been very poor for the last couple of years and many recent retirees feel aggrieved that they were forced to buy poor value products that pay a paltry income.

Experts say there is a market for specialist brokers to buy and sell the contracts, but pricing them would be difficult and there would be significant fees involved, as well as possible tax implications.